ECB – key to intervene in euro crisis, economists say

Germany rejected calls to make the European Central Bank a lender of last resort. ECB’s president said the bank would not deviate from its focus on price stability and suggested that other measures could undercut the bank’s credibility.

Euro zone and International Monetary Fund (IMF) officials have discussed the idea of the European Central Bank (ECB) lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest euro zone sovereigns, Xinhua informs. The idea appears as the rising severity of the euro zone debt crisis, which now threatens to engulf Italy, or even France, makes policymakers desperate to get the ECB, with its limitless resources as a central bank, more involved in the rescue efforts to buy governments time for reforms. Economists say only the ECB now can offer a credible guarantee to markets, as plans to leverage the firepower of the euro zone bailout fund EFSF to EUR 1 trillion were unlikely to fully materialize or, even if they do, to be sufficient.

But, according to the BBC, EU law forbids the ECB to finance government borrowing. The bank has repeatedly said it would not become the lender of last resort to euro zone governments, which should first of all change policies that created large public debt and slow growth. France, through its Finance Minister Francois Baroin has openly called for the ECB to get more involved by issuing the euro zone bailout fund – the European Financial Stability Facility (EFSF) – a banking license that would allow it to refinance itself with the ECB liquidity operations. Such a move would allow the fund to borrow from the ECB, giving it extra firepower to fight the spreading crisis. “The position of France … is that the way to prevent contagion is for the EFSF to have a banking licence,” Baroin said on the sidelines of an awards ceremony. Yet Germany fiercely opposes such an idea, fearing it would lead to financing government deficits, endanger the ECB’s independence and in the end lead to higher inflation, which would make all euro zone citizens poorer. German Chancellor Angela Merkel made clear Berlin would resist pressure for the central bank to take a bigger role in resolving the debt crisis, saying European Union rules prohibited such action. “The way we see the treaties, the ECB doesn’t have the possibility of solving these problems,” she said after talks with visiting Irish Prime Minister Enda Kenny.

In his first speech as president of ECB, Mario Draghi complained on Friday that Europe’s political leaders had been too slow to carry out their own plans to address the sovereign debt crisis. And despite ever louder calls for central bank intervention, Draghi offered no hope he would come to any country’s rescue by pumping money into the financial markets. Draghi, who took office at the beginning of the month, implicitly rejected calls for the central bank to use its enormous resources to stop the upward creep of borrowing costs for Spain and Italy, which threatens their solvency and, by extension, the European and global economies. Draghi said the bank would not deviate from its focus on price stability and suggested that other measures could undercut the bank’s credibility. In his turn, German Finance Minister Wolfgang Schaeuble Friday stressed that the ECB would not be used as a lender of last resort for governments. The minister said that one potential solution is a fiscal union. He believed all of Europe will one day use the single currency, including the U.K., Deutsche Presse Agentur reported.

Euro rose and european shares reversed losses

The euro gained on Friday on hopes that ECB may get involved in a plan to help struggling euro zone countries, but world stocks fell as many investors continued to fear a spread of the region’s debt crisis into core European economies, Wall Street Journal reports. The euro zone common currency rose 1 percent against the dollar at 1.3600, pulling away from a five-week low of USD 1.3420 struck on Thursday. In Europe, the FTSEurofirst 300 finished 0.7 percent lower. World stocks, measured by the MSCI All-Country World Index, declined 0.6 percent. US crude oil prices settled USD 1.26 down at USD 97.67. Benchmark 10-year US Treasury notes fell 13/32, sending their yield up to 2.01 percent, as a decline in Italian government bond yields reduced their safe-haven bid.

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